Independent Fiscal Office talks Pa. economy, budgetary issues

The commonwealth's growing revenue shortfall is a big topic of discussion among policymakers month after month.

With the deficit now estimated at about $500 million and projected to hit $719 million by the end of the fiscal year in June, all eyes have turned to Gov. Tom Corbett's proposed 2012-13 budget.

Will revenue be better than expected after April 15 and how will that impact spring and summer budget negotiations?

Hoping to provide the General Assembly and the governor with the most up-to-date revenue figures and fiscal projections come deliberation time, state legislation created the Independent Fiscal Officein 2010 to operate in an objective advisory role on economic and budgetary issues.

Legislative leaders in August named Matthew Knittel, a former senior economist with the U.S. Department of Treasury, as the independent state agency's first executive director.

Knittel, 44, holds a master's and doctorate in economics from Michigan State University. The Hampden Township resident spent 13 years with the Treasury before accepting the new position. He was one of 19 applicants.

The IFO was appropriated $1.9 million in the current budget. The agency, which has a staff of three — including Deputy Director Mark Ryan — is operating out of the North Office Building until permanent office space is finished on the second floor of the Rachel Carson State Office Building.

Ryan, 51, holds a master's degree in public management and policy from Heinz College at Carnegie Mellon University. The East Hempfield Township resident previously served as the executive director of the Pennsylvania Senate Finance Committee.

The Business Journal recently sat down with Knittel and Ryan to discuss the IFO's early beginnings, its role in the state budget process and future analysis projects.

Q: Why was the IFO created and what should business leaders know about it?

Knittel: My understanding is there was some level of frustration with the budget process, in particular that the official revenue estimate was not transmitted in a timely and transparent fashion that the General Assembly had enough time to consider it and look it over closely.

One of our main responsibilities is to produce an official revenue estimate. We provide one on May 1, a preliminary estimate, and then again on June 15 we have a final revenue estimate. We view ourselves as an information provider and an analysis provider. We do things in a very transparent fashion. Everything that we do, all of the assumptions we make and research we use, has to be made known publicly so people understand exactly how we're deriving our computations.

Ryan: In a very broad sense, our job is to serve as a credible source of information and analysis regarding budgetary and economic issues, so that it's free of any partisan spin. We can provide the information to the policymakers so they can decide how best to proceed on any given issue.

Our goal is to be factual and straightforward and provide the best estimates possible. I think there is a desire in the public and among the legislators to get the numbers right. With any estimate, there is always room for disagreement. One might have different assumptions and that's why it's important to put the assumptions out there so the public and the policymakers can judge whether assumptions are reasonable and the information is useful. In that process, we incorporate a lot of feedback and try to take a look at multiple sources of information to determine what is best.

How do your assessments of the state's fiscal condition and projections for the future differ from the Office of the Budget and Department of Revenue?

Knittel: We're all using the same economic assumptions, the same economics provider, and that's (IHS) Global Insight. I would say very broadly that compared to the economic assumptions that have been put out recently we're a bit more optimistic. We base that optimism on some very recent reports, on the labor market and consumer outlook.

With the way budget process works, there is such a lag time. By the time (revenue information is) put out, the information that you're using is already a month or two old. Once Global Insight has a chance to incorporate that (recent report) data, we think the economic forecast will come up and, therefore, receipts will be slightly stronger if that holds.

It's probably a little too soon (to project revenue shortfall). We are a bit more optimistic moving forward. We do think there's going to be a significant shortfall just like they do.

Ryan: We're all looking at similar pieces of information. The timelines are different. We're on different cycles. At any point in the cycle, the different pieces of information are available. As we get ready to do our own estimate, we'll take the latest information and try to incorporate that and then lay out what we've done. It's not a good comparison because we're not always analyzing the same thing at the same time.

We're not saying the shortfall is going to disappear. It's more of a matter of degree.

What will be your role in this budget process as lawmakers work through this and ultimately approve a budget this summer?

Knittel: We'll be putting out our first revenue estimate on May 1. Our numbers will be the first ones out there for consideration after we see the large final payments that are coming in the spring. I view our office as being the front-runner in the budget process and getting the first official, or semiofficial, number out there for consideration.

Ryan: With the June 30 (budget) deadline, as one gets closer, the discussions take on more urgency. I believe that the General Assembly looked at the date and said it would be useful for them in the discussion to have a number on the table by May 1. That does come after the due date for corporate and personal taxes in April. The final estimate by June 15 could take a fuller account of the spring revenue and the latest economic assumptions and economic news, so there would be an updated number in time that they could take action prior to the June 30 deadline.

What are some current analysis projects and what will the IFO be exploring moving forward? What do you hope is the takeaway for those reading your reports?

Knittel: What we hope to do moving forward is each month to put out a few pieces on our website that are exploring something to do with the economy or taxes and how they might impact residents or businesses in the commonwealth. It may be what they can expect or how they should adapt their behavior moving forward.

One of the major projects that the office has to work on are executive-level performance measures. That's going to be a multi-year effort looking across all executive agencies and trying to develop outcome-based measures that can be used by policymakers to gauge the effectiveness of the executive agencies. There is another study on sales and use tax that we have to put out to make recommendations to change the system.

Ryan: We're trying to get out and meet with as many people as possible. It's a little hard because we're trying to get the office up and running, and meet deadlines for analysis. To the extent possible and especially as we add staff, we want to make an effort to be out in the community.

Where do you see PA's economy going in the short and long term? Where are the growth areas that could push up state revenues or investment in the commonwealth?

Knittel: Moving forward, we think things are brightening. We're slowly emerging out of the confines out of the recession. Some of the factors that have been slowing down the growth are being alleviated.

Moving forward, the biggest uncertainties are two things. Of course people have been talking about the European situation. We're also concerned about the federal tax policy moving forward. A lot of tax provisions are going to expire going into 2013.

There are definitely some bright spots. Certainly the drilling and mining sector has been doing very well with strong job gains. Recent data shows manufacturing has had decent job gains after a long decline of shedding jobs.

We do think moving forward that consumers are having an improved outlook. There has been pent-up demand. We see it in sales tax receipts for motor vehicles sales. They are up very strongly, about 11 percent for the first half of the fiscal year. Generally, durable goods purchases like furniture, the big-ticket items, support the story that consumers are feeling a little better and making those purchases now.

The same (goes) with the housing market. We think things have roughly bottomed out and the economic assumptions suggest that as well for 2011. (We see) very gradual, modest improvement moving forward.

Ryan: We'll be tracking monthly releases of new economic information and trying to figure out what it means for Pennsylvania and our revenue situation. We want to have analysts who become experts in those areas so they can bring that expertise to bear when they do the revenue estimates.

We take all of that data and try to make some sense out of it. There are people that do bits and pieces of that, but our job is to not put a spin on it. We just use our best efforts and experience to try and say what it means. We want to be consistent on how we present the information. We're not going to present in different ways month to month just to meet a specific policy objective.